India undeterred by Cairn, will defend stand in arbitration row: Sources

India is in the process of filing an appeal at The Hague over the $1.4 billion arbitration award, sources tell Business Standard.

India is confident that it can strongly defend its interests if Cairn Energy starts proceedings to enforce a $1.4 billion arbitration award it has won against the country, said official sources on Wednesday, reacting after the company told New Delhi it is identifying for seizure assets belonging to the Indian government in 160 countries.

India is in the process of filing an appeal at The Hague over the $1.4 billion arbitration award.

“Cairn set up a tax abusive structure and did not pay taxes anywhere in the world on the gains that it made in India. In the said case, it is well within India’s sovereign powers to redress the situation of double non taxation and tax abuse,” said a source. India is open for a constructive settlement of tax disputes within the existing legal frameworks, he said.

Cairn CEO Simon Thomson met top finance ministry officials last month for three days to negotiate a solution, but sources said the company was yet to respond after the discussions.

Cairn had on Tuesday said that the company would go to court to seize the assets if its arbitration award is not honoured. The company could also monetize the award with a potential to transfer the award to third party funds.

The arbitration award, which stood at $1.7 billion at the year-end ($1.2 billion plus interest currently totaling $490 million), was enforceable against India-owned assets in over 160 countries that have signed and ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the company said in a presentation after announcing results on Tuesday.

“Cairn has already taken steps to have the award recognised in certain major jurisdictions in which Indian sovereign assets have been identified. We have to register the award in various countries before we think of taking the next step, which would be to go to court with an application to seize assets belonging to the Indian government,” said a person close to the development.

Cairn said the company has identified items/ assets that belong to the Indian government, “should we need to take action to protect the interests of our shareholders who have been waiting seven years for clarity on this issue”.

The asset could be pledged against recourse or non-recourse financing. It said direct discussions on settlement mechanisms with the Indian government was underway even through diplomatic channels. The award it said was enforceable in more than 160 jurisdictions under the 1958 New York Convention.

India has finalized the grounds for appeal against the award and it is finalising discussions with Dutch lawyers. Based on the appeal, India will apply for a stay on the enforcement of the award at a lower Dutch court. It will also contest the enforcement in eight other jurisdictions including the US, UK, Canada and France. Getting a stay may take another three to four months after the appeal.

The energy major has been building pressure on India to honour the December 21 arbitration award and has filed a case in the US, the UK, Netherlands, Canada, France, Singapore, Japan, the United Arab Emirates and Cayman Islands. While courts in five countries, including the US, Canada and the UK, have given recognition to the arbitration, the oil major has also started the process to register the award in Singapore, Japan, the UAE and Cayman Islands. This will allow the company to petition for seizing of Indian government assets such as aircraft, ships, bank accounts, etc, in those jurisdictions, to recover the award dues.

In the appeal at The Hague, India is expected to take a stand that the government has the sovereign right of taxation and private individuals cannot decide on that. Besides, it falls outside the domain of a bilateral investment treaty and beyond the jurisdiction of international arbitration. Also, the government is likely to invoke international public policy, arguing that Cairn did not pay tax in any jurisdiction across the globe.

The government had lost an international arbitration case to Cairn Plc under the retrospective tax legislation amendment in December. The case pertains to the Rs 24,500-crore tax demand on capital gains made by the oil major in reorganising its India business in 2006-07.

The Rs 8,800-crore arbitration award includes legal fees paid by Cairn for the case.

It also includes reversing the dividend as well as the tax refund that the government had seized and shares the I-T department sold to recover part of the demand.